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Which Borrowers Are Impacted By the ATR Rule?

UnderwritingDespite debt-to-income ratios rising in recent years, delinquencies have remained low in the five years since the Ability to Repay (ATR) requirements were introduced under the Dodd-Frank Act, according to the findings of the Consumer Financial Protection Bureau's [1] (CFPB's) long-awaited report on the Ability to Repay (ATR) and the Qualified Mortgage (QM) Rule (ATR-QM Rule).

The report, which looks at data of how these rules have impacted the mortgage market in the five years since they came into effect, revealed that despite the rise in home prices to pre-crisis levels, five to eight percent of conventional loans for home purchase have DTI exceeding 45 percent; in contrast, approximately 24 to 25 percent of loans originated in 2005–2007 exceeded that ratio.

Despite these factors, in the conventional mortgage market, DTI ratios are constrained from returning to crisis-era levels by a combination of the ATR requirement, GSE underwriting limits which define the loans which are eligible for purchase by the GSEs and the CFPB's General QM DTI threshold which limits this category of loans to those with DTIs at or below43 percent.

The report revealed that while housing prices had returned to the pre-crisis levels, only 5-8 percent of conventional home loans reflected DTI exceeding 45 percent. In contrast, around 24 to 25 percent of loans originated in 2005-2007 exceeded that ratio.

However, it noted that the Rule was more likely to have affected access to credit on some segments of the market. They included borrowers with high DTI, self-employed borrowers, and those seeking smaller loan amounts. However, the report, citing HMDA data, noted that for the last group of borrowers the Rule likely had no effect on access to credit for smaller amount loans.

Comparing the delinquency rates between QM and non-QM loans, the report revealed that while the delinquency rate of loans with DTIs exceeding 43 percent  (non-QM loans) remained at a steady 0.6 percent,  the delinquency rate of GSE loans with DTIs above 43 percent increased from 0.6 percent for loans originated in 2012-2013 to 1 percent among 2014-2015 originations. "Thus, although the performance of non-QM loans did not improve in absolute terms, it has improved relative to the performance of comparable QM loans," the CFPB report said.

Read the full report here [2].